Cosigners could be very vulnerable in a consumer bankruptcy case. It all depends upon the facts and circumstances of each case, though. Obviously, the easiest type of consumer bankruptcy case does not have a cosigner issue. But, in today’s world, banks and other finance companies want to get as many fish on the proverbial hook as they possibly can, so, they ask for cosigners to protect themselves.
The first point I would like to make is that if you do not need a cosigner, then do not ask a friend or relative to cosign for you. Explore all avenues of financing before taking the cosign route. Similarly, for people being asked to be cosigners, please make sure that the person asking you to cosign a loan for them has explored all possible options of financing and or acquiring what they need without a cosigner. If they have explored all options, I would politely decline until you know for sure that there is no other alternative available.
Cosigners Dragged into Bankruptcy Filings
Without the help of an experienced bankruptcy attorney, your cosigner could be unprotected and left to fend for themselves with a creditor. We’ve seen all types of co-signed loans. Student loans, car loans, mortgages, and even purchases of furniture and jewelry have had cosigners. The big question is what happens when one of those individuals needs to file for bankruptcy protection? If the person filing for bankruptcy protection files a Chapter 7, the cosigner must be listed as a notice party. In other words, the creditor and cosigner must each be notified of the bankruptcy filing and the debtor’s intention when it comes to the collateral.
For example, let’s say a husband and wife purchase a car together with a five-year loan. Both the husband and the wife sign for the vehicle, thereby obligating each other for the full amount of the loan. A year later, they decide to get divorced. While the divorce court may get to decide which spouse keeps the vehicle, if one of the spouses subsequently files for bankruptcy protection, a discrepancy could arise. Let’s say that the wife decides to file for bankruptcy protection, and she wants to surrender the car back to the creditor. Believe it or not, this scenario happens more often than you think. If she does so, the creditor will be entitled to receive the car back, but the ex-husband remains obligated on the remainder of the car loan. Obviously, this can create emotional and financial issues.
Similarly, in Chapter 13 bankruptcy, a debtor provides a Chapter 13 plan to all of their creditors detailing exactly what they are going to do with each and every obligation. When it comes to cars, homes, or even timeshares, a joint obligation raises numerous issues, and those issues must be faced head-on if the debtor hopes to achieve a bankruptcy discharge.
All of these issues must be discussed with an experienced bankruptcy attorney before filing for bankruptcy protection. Sometimes, other arrangements can be made that will protect the cosigner. Other times, a consumer bankruptcy filing may not be the best option based on the circumstances. Either way, if you were going to make a great financial decision for yourself and your family, you need to figure out what your legal options are and how best to deal with them.
Get Legal Counsel Today
At The Dellutri Law Group, we offer a complimentary strategy session for individuals thinking about filing for bankruptcy. During your strategy session, we will answer all of your questions, such as those related to cosigner obligations, and provide you with a plan going forward. Many times, our clients are shocked to learn that bankruptcy is not their best option. Wouldn’t you like to know what is best for you and your family going forward? Contact our offices today to get started.